Key Points:
- US citizens and residents are required to file tax returns and pay taxes on their worldwide income, regardless of where they live.
- Failure to file or pay taxes can result in penalties, interest charges, passport denial, and even criminal prosecution.
- There is no legal way to avoid paying US taxes while living abroad, except by renouncing US citizenship.
Understanding US Tax Obligations for Expats
The United States operates under a citizenship-based taxation system, which means that US citizens and residents are required to pay taxes on their worldwide income, regardless of where they live. This is in contrast to many other countries that use a residency-based taxation system, where only income earned within the country is taxed.
As a result, US citizens and residents living abroad are still obligated to file US tax returns and pay taxes on their foreign income. This includes income from employment, investments, and other sources.
Consequences of Failing to File or Pay Taxes
Failing to file or pay US taxes while living abroad can have serious consequences, including:
- Penalties: The IRS charges penalties for both late filing and late payments. The penalty for late filing is 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%. The penalty for late payment is 0.5% of the unpaid taxes for each month the payment is late, up to a maximum of 25%.
- Interest charges: The IRS also charges interest on unpaid taxes. The interest rate is currently 3% per year, compounded daily.
- Passport denial: The IRS can deny passports to US citizens who have seriously delinquent tax debts. A seriously delinquent tax debt is defined as a tax debt that is more than $50,000 and that has been unpaid for more than 180 days.
- Criminal prosecution: In some cases, the IRS can criminally prosecute US citizens who willfully fail to file or pay taxes. Willful failure to file or pay taxes is a felony offense that can result in fines and imprisonment.
Avoiding Double Taxation
One of the concerns of US citizens living abroad is the potential for double taxation. This can occur when a person is required to pay taxes on the same income in both the US and the country where they reside.
To avoid double taxation, the US has entered into tax treaties with many countries. These treaties typically provide for a credit against US taxes for taxes paid to the foreign country.
In addition, the US tax code includes a number of provisions that can help to reduce or eliminate double taxation, such as the foreign earned income exclusion and the foreign tax credit.
Renouncing US Citizenship
The only way to legally avoid paying US taxes while living abroad is to renounce US citizenship. However, renouncing US citizenship is a serious decision that should not be taken lightly. There are a number of factors to consider, such as the potential impact on your ability to travel, work, and live in the US.
US citizens and residents living abroad are required to file US tax returns and pay taxes on their worldwide income. Failure to do so can result in serious consequences, including penalties, interest charges, passport denial, and even criminal prosecution.
There are a number of provisions in the US tax code that can help to reduce or eliminate double taxation. However, the only way to legally avoid paying US taxes while living abroad is to renounce US citizenship.
What happens if I don’t file my taxes? | How Bad Is It?
FAQ
How can I leave us and not pay taxes?
Can I leave the country if I owe taxes?
What is the punishment for not paying taxes in USA?
What happens if a US citizen doesnt pay taxes?
What happens if I don’t pay my taxes on time?
If you have self-employed income, your taxes are due quarterly, and you must submit estimated tax payments directly to the IRS. The penalty is triggered when you don’t pay enough or you don’t pay on time. This may happen even if you get a refund if the quarterly taxes were late.
What happens if you don’t file your taxes?
Some people file their taxes but don’t pay. Others don’t pay, and they don’t even file. Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who specializes in representing taxpayers before the IRS and is a fellow of the National Tax Practice Institute, says you face the biggest penalty if you don’t file your tax return at all.
What if I owe a tax bill but can’t pay in full?
Taxpayers struggling to meet their tax obligation may consider these payment options. Taxpayers who owe but cannot pay in full by April 18 don’t have to wait for a tax bill to set up a payment plan. They can apply for a payment plan at IRS.gov/paymentplan. These plans can be either short- or long-term.
What happens if you leave the IRS?
They carry big civil and even potential criminal penalties. The civil penalties can consume the entire balance of an account. Ironically, even leaving America can be costly. To exit, you must prove 5 years of IRS tax compliance, and getting into IRS compliance can be expensive and worrisome.